By Jennifer Van Brunt


The opening of the second fiscal quarter of 1998 has brought with it a heady mixture of good tidings and bad omens for the biotechnology sector.

While some companies are positively brimming with great news, others are teetering on the brink of disaster. And this comes in the middle of one of the most selective financing eras that biotech companies have seen for years.

The public offerings market has been extremely tight in 1998, and only in the last few weeks has there been any indication that investors might be warming up to biotech-related stock offerings. Even now, they are picking and choosing very carefully.

The real source of cash in 1998 has come from convertible debt offerings, but again, only a mere handful of firms have come away successful (most recently, Aviron [NASDAQ:AVIR], of Mountain View, Calif., which raised $100 million through the sale of convertible subordinated notes).

Interestingly, even though financing is tight, stocks in the biotech sector as a group have been steadily gaining strength all year. By the last day of the first quarter, they had gained an average of 9.3 percent in value over their 1997 closing prices (see the graphs on p. 9 for biotechnology stock performance in 1998, as measured by two different methods).

Good News/Bad News

The recent news that's rocked the biotech sector centers on pronouncements — both positive and negative — from the FDA.

On one hand, COR Therapeutics Inc. (NASDAQ:CORR) announced late last week that its heart drug Integrilin is broadly approvable — both for treating patients with acute coronary syndromes and as an adjunct to percutaneous transluminal coronary angioplasty. By issuing this judgment, the FDA has overridden its Cardiovascular and Renal Drugs Advisory Committee, which in late January voted against recommending approval of Integrilin for treating acute syndromes, including unstable angina and non-Q-wave myocardial infarction. (The panel did, however, vote in favor of approval of the platelet aggregation inhibitor for the narrower indication as an adjunct therapy in angioplasties.)

This joyous news sent COR's stock soaring; in early trading April 2, it jumped immediately by almost 60 percent, from $12.468 to $19.875 per share, on very heavy trading volume. The stock rocketed higher, and by the end of the day had gained 79 percent, to close at $22.312.

Conversely, Interferon Sciences Inc. (NASDAQ:IFSC) felt the back of the FDA's hand when the agency informed the company late last week that the results of its Phase III clinical trial of Alferon N Injection for treating HIV infection were insufficient to file for approval. In fact, the agency said that another clinical trial would be necessary. Alferon N, a natural-source, multispecies alpha interferon, was approved by the FDA in October 1989 for treating certain types of genital warts. Since then, Interferon Sciences, of New Brunswick, N.J., has been testing the product for other indications — including hepatitis C virus (HCV) infection. That trial, too, seems to have failed; Interferon Sciences announced that an interim analysis of its Phase III trial of Alferon N for treating HCV demonstrated that the product is not superior to the control treatment (an approved therapy). The company will not seek FDA approval for this indication.

The discouraging clinical events have spilled over into the company's operations, too, for it is now reviewing its financial resources and warns that a major restructuring of its operations will be required. The stock, which had already been suffering (having dropped 18% in value between 12/31/97 and 3/31/98), plunged another 75 percent in early trading April 2, from $7.062 to $1.750 per share. It regained some of that by the end of the day, closing at $2.156 per share, a 69 percent loss.

Unfortunately, Interferon Sciences is not the only biotech company that has reached a major decision regarding its business plans of late. OncorMed Inc. (AMEX:ONM), Cytogen Corp. (NASDAQ:CYTO) and Techniclone Corp. (NASDAQ:TCLN) also are waving red flags. Both OncorMed, based in Gaithersburg, Md., and Cytogen, of Princeton, N.J., announced last week that auditors have questioned their ability to continue as going concerns. And Tustin, Calif.-based Techniclone also reported it has retained an investment banking firm to help it assess financing alternatives and alternative capital structures. Techniclone is within a hair's breadth of being delisted from the Nasdaq National Market for failing to meet its minimum listing requirements.

Public Markets Inch Open

Meanwhile, the continued improvement in biotech sector stock performance — coupled with a few successful public offerings in March — bodes well for biotech financing activities this spring. There were four initial public offerings (IPOs) in March: The most lucrative, of course, was Transgene SA's international offering, whereby the French gene therapy company picked up $57.2 million and listings on two exchanges (Paris' Nouveau Marche and Nasdaq) in one fell swoop. The leanest was LJL Biosystems Inc.'s IPO, which raised a mere $14 million for the Sunnyvale, Calif.-based developer of fluorescence-based assays for high-throughput screening and other drug discovery tools. LJL Biosystems (NASDAQ:LJLB) originally had planned to raise as much as $32 million through its IPO, but was forced to ratchet the offering down a few notches.

Even though the public offerings market got off to an excruciatingly slow start in 1998, the first quarter ended up being about average for the biotech sector. There were seven IPOs in the first three months of 1998 (although not all of them have been in the U.S.), which together have raised about $226 million; there were also seven IPOs in the first quarter of 1997 (which garnered $262 million) and seven in the first quarter of 1994 (which reaped $160 million). In 1995, there were only three IPOs in the first quarter — all of them in January — which together raised $50 million. But in 1996 — which was a hot year — there were 14 IPOs between January and the end of March, which gathered $356 million in all.

Follow-on offerings also have been few and far between in 1998 — three in the first three months, with total gross proceeds of $146 million. There haven't been so few since 1995, when three follow-on offerings raised a scant $23 million. By contrast, there were 16 follow-on offerings in the first quarter of 1996, which reaped $914 million total, and 14 in the first quarter of 1994, with combined proceeds of $366 million.

In 1998, the biggest winner has been GelTex Pharmaceuticals Inc. (NASDAQ:GELX), which scored $81 million in its March follow-on offering. The Waltham, Mass., firm is developing non-absorbed, polymer-based drugs for treating excess phosphate and cholesterol levels. It has filed a new drug application for one product — RenaGel for dialysis patients, which is intended to control elevated phosphorus levels by binding to dietary phosphate in the intestinal tract — and has a second compound in Phase III trials — CholestaGel, which binds to and removes bile acids from the intestinal tract, thereby stimulating the liver to remove cholesterol from the bloodstream. Investors obviously liked the story.